If you’re just starting to invest, there are a few things you need to understand early on.
While choosing a brokerage and a couple of stocks to start with is key to your investment journey, understanding how to actually read a stock or stock chart is just as vital.
Reading: How to read stock market numbers
but, how do you read the actions? And what are some easy points that can make investing simpler and less confusing?
how to read actions
Reading stock charts, or stock quotes, is a crucial skill in being able to understand how a stock is behaving, what is happening in the market in general, and how that stock is expected to behave. Knowing the basics can help investors make better decisions and is a critical first step to getting started and understanding investing.
Stocks have quote or chart pages, which provide basic and more detailed information about the stock, its performance, and the company in general. So what constitutes a stock chart?
what is a stock chart?
A stock chart or table is a set of information about the stock of a particular company that typically displays information about price changes, current trading price, all-time highs and lows, dividends, trading volume, and other financial information of the company.
52 week highs and lows
The 52-week high and low are key metrics when looking at a stock’s trajectory over a given period (in this case, a year). 52-week highs and lows show the highest and lowest prices at which the stock traded in that time period, although they do not typically show the previous day’s trading price.
The stock symbol is the symbol used on the stock market to denote a particular stock. For example, Apple’s ticker is (AAPL) on Nasdaq, while Snapchat’s ticker is (Snap) on the New York Stock Exchange (NYSE). the ticker is usually located under a column titled “ticker” or, in some cases, right next to the stock name in parentheses.
However, while some tickers look a lot like the company name, such as microsoft and msft (msft), not all company tickers do, so be sure to look up the company name. suitable when looking for tickers.
dividend per share
Not all companies pay dividends, which are essentially small payments of company profits to shareholders. But for those that do, the dividend per share, or the annual dividend payout per share for investors, will be represented on the stock chart.
So, the dividend yield is the percentage yield on that dividend and is calculated by dividing the annual dividend by the current stock price.
The p/e ratio, or price/earnings ratio, is a key metric when looking at a stock chart. The P/E ratio is obtained by dividing the current stock price by earnings per share for the last year (four quarters).
day high and low
The day’s high and low simply show the highest and lowest prices the stock traded at throughout the day, from the open to the close of the market. however, the high and low of the day may not be the opening and closing prices; those are separate figures.
The opening price is simply the price at which the stock started trading on a given day.
The closing price is perhaps more significant than the opening price for most stocks. The close is the price at which the stock ceased trading during normal trading hours (after-hours trading can also affect the price of the stock). if a stock closes above the previous close, it’s considered a bullish move for the stock (and will impact things like candlestick charts, which we’ll get to later). Vice versa, if a stock’s closing price is below the previous day’s close, the stock shows a downward movement.
the previous one. close, or previous close, is the price at which the stock closed the day before (24 hours earlier).
whether a stock is “up” or “down”, it has to do with the net change. The net change in a stock is a change in dollar value from the previous day’s closing price. a positive net change will make the stock “go up,” while a negative net change will make the stock look “down” for that day.
how to read a stock chart
A stock chart is a bit different than basic information about a stock: Stock charts include charts or plot lines that represent the price movements of a given stock. While you can customize how the chart is drawn (once you go further), price lines are usually plotted as a line or mountain chart. the thin line represents price movements over a given period, usually six months or a year. If you’re working with an interactive chart, you can set the chart to different time frames, from five years back to one day.
However, when reading and interpreting a stock chart, there are a few things you need to do to get started.
1. look at the price and time axes
All stock charts have two axes: the price axis and the time axis. the horizontal (or bottom) axis shows the time period selected for the stock chart. this can usually be customized to display anything from a time period of a year (or even multiple years) to a day.
The vertical (or lateral) axis shows the share price. These two axes help plot the trend lines that represent stock price over time and are the framework for the entire stock chart.
2. look for the trend line
This should be pretty obvious, but a lot of the information you can get from a stock chart can be found on the trend line.
Depending on the type of chart you’re viewing, you can choose from different chart styles, including traditional line, mountain, bar, candlestick, and other chart styles.
line charts simply track the price movements of a stock using the last price of that stock.
bar charts take the highest and lowest prices of the day plus the closing price of a stock to plot its trend.
candlestick charts look a little more complex, but generally use clear or green boxes to indicate periods when the share price closed higher (bullish), and red or pink boxes when the stock closed lower (bearish) than the previous day. The candlestick chart uses the opening, high, low, and closing prices of stocks to chart trends. For candlestick charts, the opening and closing prices are the most important in determining whether there was bullish or bearish momentum for the stock.
Watch this short video to learn more about how to read these types of charts.
In general, a simple line chart will be able to give you basic information about the trend of a stock. but it is not the only important metric to take into account.
3. identify trading volume
In addition to the stock price trend, stock trading volume is another key factor to consider when reading a stock chart.
Volume is usually indicated at the bottom of the stock chart by green and red bars (or sometimes blue or purple bars). The most important thing to look at when examining trading volume is spikes in trading volume, which can indicate the strength of a trend, whether it be high trading volume down or up. If a stock’s price falls and trading volume is high, it could mean the stock’s downtrend is strong rather than a momentary flicker (and vice versa if the price rises).
4. identify lines of support and resistance
Still, another important aspect to examine on a stock chart is support and resistance lines. Whenever a stock trades up or down, it usually falls within what are called support and resistance lines. Essentially, the support line is a certain price by which the stock generally does not fall – it “supports” the stock up and prevents it from trading below that price given market signals. conversely, the resistance line is a certain price that the stock does not normally trade above: it “resists” the stock from breaking above that maximum price.
Stock prices typically bounce between these support and resistance lines, but if the stock breaks above the resistance line, that previous resistance line becomes the stock’s new support line, and the stock can go higher more from there. however, the opposite occurs if a stock falls below the support line.
Following support and resistance lines is important to predict or understand the general trend of a stock and when it might go up or down.
There are many other slightly more complicated shapes and metrics to look at when reading a stock chart, so it’s important to educate yourself on technical analysis to get the most out of stock information when investing.
but what else can you get from a stock chart in general?
stock chart information
stock charts may also have additional information about the company and historical stock performance.
earnings per share (eps)
Earnings per share, or EPS, can be found on many stock charts and is a good indicator of how well the company is doing. EPS measures the amount of net earnings a company has earned per share of its stock. For investors, EPS essentially represents the portion of the company’s earnings in which their shares have an interest.
A company’s EPS is usually found among other information on its stock chart and is updated every quarter after the company reports earnings.
The market capitalization of a company is calculated by multiplying the total number of outstanding shares of the company (shares that the company has issued to the public) by the current price of a share.
Most stock charts include this information.
1-year target estimate
While slightly less common on a basic stock chart, the 1-year target estimate is an analyst’s estimate of what a stock will be worth in one year. however, because analysts tend to have (sometimes drastically) different estimates, it is not generally considered a strong metric to use when reading a stock chart.
Introducing Street Courses: Financial titans Jim Cramer and Robert Powell bring you their knowledge of the market and their investment strategies. learn how to generate tax-efficient income, avoid mistakes, reduce risk, and more. With our courses, you will have the necessary tools and knowledge to achieve your financial goals. Learn more about thestreet’s courses on investing and personal finance here.